What blows my mind (as in I'm impressed, not baffled), is that they attempted the 80M reno and not the 30M reno. Obviously tons of work was needed but they didn't need to go this far, disassembling it brick by brick from the top down...
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Originally Posted by Winnipegger
Again, not an expert, but for real estate development don't developers look at capitalization rates (net operating income to asset value ratio)? Based on the most recent publicly available information I could find, cap rates on most types of properties in Winnipeg are in-line with most other Canadian cities. See this Cushman and Wakefield report.
For example, in the linked report, the cap rate on Class A buildings in Winnipeg is 5.5% to 6.25% (that is, annual net operating income on Class A in Winnipeg is around 5 to 6% of the market value of the building itself). In Vancouver, it's lower 4.25% to 5.25% and Toronto is 4 to 4.75%.
I'm sure this isn't the only factor developers consider when looking to develop - obviously there has to be a demand for tenants and renters - but I think maybe it dispels the notion that "profits are lower in Winnipeg and that's why nobody develops!".
If we want to see revitalization in key areas in Winnipeg (i.e. downtown), the "economic development"-type agencies should focus on attracting big tenants to Winnipeg, ones that will demand space. I think we've seen that there are developers looking to develop, they just have difficulty finding new tenants. If you attract jobs to Winnipeg that would not have otherwise come, you'll attract workers which will in turn demand places to live, some of which might be close to their workplace (especially as traffic gets worse with the strong growth Winnipeg has seen and is not used to over the past 20 years). |
Cap rates are key, but it is a factor of profit relative to value. an 8% cap rate in downtown Moncton isn't necessarily nearly as profitable as a 5% in Winnipeg or 3.5% in Toronto because the building is only worth $10M compared to $25M in Winnipeg and $100M in Toronto.
Basically, hotter markets also have higher tenant security... if you're guaranteed to keep your building full due to market strength, your cap rat goes down. If your building stands to increase in value over time because the market is HOT HOT HOT, your cap rate will start low and get even lower because value is increasing at a greater rate than rent. But any investor's holding in said property has increased in value but maintained pace in income.
It also highlights potential ability to increase rents and revenue when the tenant market catches up to the property values.
In speculative or weaker (or simply less sexy) markets, cap rates are higher (and may even rise) because they don't have that torrential tenant interest or market security, or upwards potential.
But when investors spot something on sale for a 6% cap that the market says should be 5%, they will buy that in record time. It's being undervalued.
Your last paragraph is key... national, not just piecemeal tenant interest has to increase downtown. This would increase profits but push down cap rates.
I'm generalizing but you get the drift.
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Originally Posted by Andy6
Wouldn’t the low market value of some of Winnipeg’s aging Class A buildings explain the higher cap rate? I’m not sure if that figure is relevant to the profitability of building an entirely new building.
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That's a short way to say it, but I don't do that apparently.